As discussed in my last column, the semiconductor industry entered uncharted territory in 2015 with a wave of major mergers. After more than 60 years of deconsolidation, the industry made the first material steps toward consolidation. For many, this appears to be the inevitable maturation of an industry in which growth rates have slowed and further increases in return on investment depend upon the efficiencies of consolidation rather than upon growth.
The driving force for consolidation is typically the efficiencies achieved through economies of scale with larger volume. In most industries, manufacturing economies of scale are the most important. This is true for the integrated device manufacturers, or IDMs, of the semiconductor industry as well. However, these IDMs constitute a continuously shrinking share of the semiconductor industry and now consist mostly of memory producers, several very large IDMs like Intel and Samsung, and process-differentiated companies that produce analog, mixed-signal, RF and power semiconductors.
Thirty percent of the semiconductor industry is now fabless. Manufacturing economies of scale generated by the merger of fabless companies are limited (Figure 1). If two large semiconductor companies merge, the volume discounts they receive from the wafer foundries, as well as from the assembly and test subcontractors, are not greatly different. The additional volume achieved through merger likely adds only modest additional discounts.
Of course, manufacturing costs are only part of the volume-sensitive benefit of mergers. The cost benefits of a merger, often referred to as synergies, include many other types of economies of scale. One would expect to see a correlation of these cost benefits with size of semiconductor companies. What is remarkable is that such a correlation doesn’t appear to exist (Figure 2).
A look at data from the top 130 public semiconductor companies over a period of five years (Figure 2) shows no relationship between size and profitability. A linear regression coefficient of 0.0544 suggests no correlation at all.
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